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Economics 

 

Ideas to cover

  • Test revision
  • Quick Revision
  • GST – continued
  • Other tax related terminologies

 

Test Questions

 

Q . 1 ​Consider the following statements :

  1. A sustained rise in general level of prices is called inflation
  2. A mismatch between demand and supply

leads to cost-push inflation

Which of the given statements is/are correct :

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 2 ​Which of the given statements is/are correct regarding hyperinflation :

  1. A situation in the economy where inflation and unemployment both are at higher levels.
  2. Germany suffered hyperinflation during the early 1920s.
  3. In this situation people start opting for physical assets and may even switch to barter exchange.
  4. 1 and 2
  5. 2 and 3
  6. 1 and 3
  7. 1, 2 and 3

Q . 3 ​Which of the following are measures that can be used to check inflation :

  1. Import of goods that are in short supply
  2. Tax cuts to goods producers.
  3. Increase in Repo rate
  4. Buying dollars from the market
  5. 1, 2 and 3
  6. 1, 3 and 4
  7. 2, 3 and 4
  8. 1, 2, 3 and 4

Q . 4 ​Consider the following statements regarding Consumer

Price Index

  1. It is calculated by the Department of Economic Affairs,

Finance Ministry

  1. It considers inflation in food as well as housing
  2. The RBI considers CPI for the purpose of monetary policy.

Which of the given statements is/are ​incorrect?

  1. 1 and 2
  2. 1 only
  3. 3 only
  4. 2 and 3

Q . 5 ​What is meant by the term ‘core inflation’?

  1. It is inflation that excludes items that face volatile price changes.
  2. It is inflation that only considers the eight core industries.
  3. It is the inflation where government excludes all external sector debt except sovereign debt
  4. It is measured under the Wholesale Price Index

Q . 6 ​Consider the following statements regarding Wholesale Price Index :

  1. It is calculated by the Department of Industrial Policy and Promotion
  1. Manufactured products have the largest weight in the WPI basket.

Which of the given statements is/are correct​:

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 7 ​Which of the following are effects of inflation :

  1. It redistributes wealth from the creditors to the debtors
  2. Rising inflation indicates lowering aggregate demand and higher supply
  3. Investment in the economy is boosted in the short run.
  4. 1 and 2
  5. 2 and 3
  6. 1 and 3
  7. 1, 2 and 3

Q . 8 ​Consider the following statements regarding effect of inflation on tax structure of the economy:

  1. Bracket creep is experienced by direct tax payers.
  2. Nominal value of gross tax revenue increases.

Which of the given statements is/are correct :

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 9 ​Assertion : Export items gain competitive prices in the world market.

Reason : Inflation leads to currency depreciation.

  1. Both Assertion and Reason are correct and Reason is the correct explanation of the Assertion.
  2. Both Assertion and Reason are correct but Reason is not the correct explanation of the

Assertion

  1. Assertion is correct, Reason is wrong
  2. Assertion is wrong, Reason is correct.

Q . 10 ​Which of the following factors can lead to inflation:

  1. Excessive government expenditure
  2. Rise in Minimum Support Price (MSP) 3. Infrastructure Bottlenecks
  3. 1 and 2
  4. 2 and 3
  5. 1 and 3
  6. 1, 2 and 3

Q . 11 ​Consider the following statements regarding deflationary gap:

  1. Aggregate demand in the economy falls short of Aggregate Supply
  2. It is created by shortfall in total spending of the government over the national income.

Which of the given statements is/are correct :

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 12 ​Consider the following economic terms :

  1. Disinflation refers to a fall in the general level of prices over a period of time.
  2. Creeping inflation is very high inflation running in the range of double or triple digit.
  3. Reflation is the ​expansion in the level of output of an economy by government stimulus.

Which of them is/are correctly defined:

  1. 1 and 2
  2. 2 and 3
  3. 1 and 3
  4. 1, 2 and 3

Q . 13 ​Consider the following statements regarding Skewflation :

  1. Price rise of one or a small group of commodities over a sustained period of time. 2. Rise in unemployment along with rise in inflation.

Which of the given statements is/are correct :

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 14 ​Consider the following statements regarding GDP deflator:

  1. It is the ratio between GDP at current prices and GDP at constant prices.
  2. The GDP deflator cannot be less than 1

Which of the given statements is/areincorrect:

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 15 ​Assertion : The Monetary Policy Committee is responsible for inflation targeting

Reason : Inflation targeting can only be done by directing monetary policy.

  1. Both Assertion and Reason are correct and Reason is the correct explanation of the Assertion.
  2. Both Assertion and Reason are correct but Reason is not the correct explanation of the

Assertion

  1. Assertion is correct, Reason is wrong
  2. Assertion is wrong, Reason is correct.

Q . 16 ​Which of the following represent qualitative tools used by RBI to control monetary policy in India:

  1. Moral suasion
  2. Loan to value ratio
  3. Open market operations
  4. 1 and 2
  5. 2 and 3
  6. 1 and 3
  7. 1, 2 and 3

Q . 17 ​Which of the following best describes the repo rate?

  1. The rate at which RBI borrows from commercial banks
  2. The rate at which commercial banks borrow from the RBI
  3. The rate set by the Finance Ministry for RBI borrowing
  4. The rate charged by banks to the customer to avail loans.

Q . 18 ​Consider the following statements regarding Marginal Standing Facility:

  1. It is the rate at which the banks borrow overnight funds from RBI against the approved G-secs.
  2. The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility.

Which of the given statements is/are correct:

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q . 19 ​Assertion : An decrease in repo rate always leads to a decrease in interest rates on loans

Reason : Repo rate is the rate at which banks lend to the customers.

  1. Both Assertion and Reason are correct and Reason is the correct explanation of the Assertion.
  2. Both Assertion and Reason are correct but Reason is not the correct explanation of the

Assertion

  1. Assertion is correct, Reason is wrong
  2. Assertion is wrong, Reason is wrong.

Q . 20 ​If there is excess of liquidity in the market, then :

  1. Interest rates on loans will remain low
  2. Interest rates on loans will rise
  3. Interest rates on loans will remain high
  4. Interest rates will not be affected

 

Goods and Services Tax

 

  • One indirect tax for the whole nation make India one unified common market.
  • Single tax on the supply of goods and services, right from the manufacturer to the consumer.
  • Value added method
  • CGST, SGST/UTGST, IGST
  • GSTN
  • GST council

 

Goods and Services Tax

 

  • One indirect tax for the whole nation make India one unified common market.
  • Single tax on the supply of goods and services, right from the manufacturer to the consumer.
  • Value added method
  • CGST, SGST/UTGST, IGST
  • GSTN
  • GST council

 

Goods and Services Tax (Benefits)

 

To Industry and businesses

  • Easy compliance
    • Single tax
    • Easier to calculate
    • IT based system – all services – payment, returns, refunds etc.
  • Uniformity of tax rates and structures
    • Single indirect tax fiscal policy (GST council)
    • Single GST all over India
  • Removal of cascading
  • Improved competitiveness
    • Cascading removed -> lower prices -> increased competitiveness – Invoice to invoice -> tax credits -> increased comp. – Less transport delays -> improve comp.
  • Gain to manufacturers and exporters

 

Goods and Services Tax (Benefits)

 

To Central and State Governments

  • Simple and easy to administer
    • Single network – GSTN, digital etc.
  • Better controls on leakage
    • Robust IT infrastructure -> better tax compliance; no issue of bribery
    • Input tax credit -> inbuilt incentive mechanism for invoicing in supply chain
  • Higher revenue efficiency
    • decrease the cost of collection of tax revenues

 

Goods and Services Tax (Benefits)

 

To Consumer

  • Single and transparent tax proportionate to the value of goods and services
    • Removal of cascading and such hidden taxes
    • Clarity of tax burden on purchases
    • transparency
  • Relief in overall tax burden
    • Efficiency , prevention of leakage = lowering of overall tax burden on most commodities

Goods and Services Tax (Benefits)

 

Economy Wide

  • Ease of Doing business
  • Boost to Make in India
  • Larger tax base = low evasion = more development expenditure or lower fiscal deficit
  • Better policy transmission on ground
  • Balance of payments benefits because of export promotion (exports are zero rated); and reduced inflation

 

Goods and Services Tax(challenges)

 

  1. Multiple rates still induce complexity in taxation regime with certain artificial classifications (4 major slabs – 5,12,18,28 + others like gold@3%, precious stones@.25%)
  2. GSTN, the IT backbone of GST, suffers major problems with various departments, industry bodies not integrated, causing hassles to taxpayers
  3. Non-passage of tax reduction benefits to consumers through corporate profiteering

– For this government had established a National Anti- Profiteering agency (NAA)

 

Goods and Services Tax(challenges)

 

  • NAA: constituted under Section 171 of the Central Goods and Services Tax Act, 2017 to ensure that the reduction in rate of tax or the benefit of input tax credit is passed on to the recipient by way of commensurate reduction in prices
  • Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of Central Tax to

stress upon consumer awareness programmes;

  • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
  • Receiving complaints through email and NAA portal.
  • Working with consumer welfare organizations in order to facilitate outreach activities.

Goods and Services Tax(challenges)

 

  1. Issue with SMEs and other small taxpayers in being GST compliant
  • issue GST-complaint invoices,
  • be compliant to digital record-keeping,
  • file timely returns
  • The government had initiated a “composition levy scheme” for Small taxpayers
  • Small Taxpayers with annual turnover of “XX” can “opt” for composition levy instead of GST
  • Under the scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of ITC
  • A taxpayer opting for composition levy shall not collect any tax from his customers nor shall he be entitled to claim any input tax credit
  • Not applicable on interstate supplies

 

Goods and Services Tax(challenges)

  • Short term increase in operating costs – particularly impacts smaller firms
  • Issue of State cess e.g. Kerala flood Cess

– Prevents formation of one nation one market

Other terms related to Taxation

  • Surcharge
  • Cess
  • Tax Expenditure
  • Equalization levy
  • GAFA Tax
  • Angel Tax

Other terms related to Taxation

 

Surcharge

  • Surcharge is a charge on any tax, charged on the tax already paid
  • e. tax on tax or charge on tax
  • g. on certain income groups, 10% surcharge over 30% base tax rate i.e. total tax = 30% + 3% = 33%; 12% surcharge on even higher income

Other terms related to Taxation

 

Surcharge v/s Tax (i.e. why not just have 33% tax)

  • Constitution under financial relations between centre and the state mandates a division of direct tax between centre and the states, the division of tax is decided by Finance commission (Art 280)
  • As surcharge is not technically a tax, there is no obligation to share it with states. So it can be directly and wholly transferred to the CFI

Other terms related to Taxation

 

CESS

  • A cess imposed by the central government is a tax on tax, levied by the government for a specific purpose
  • g. education cess, road development cess, Swachh bharat cess etc.
  • So if 3% cess on 30% tax then total tax liability

= 30% + 3%(30) = 30% + 0.9% = 30.9%

  • Again, no obligation to share with the states

 

Other terms related to Taxation

 

Major difference between surcharge and cess?

  • Revenue raised from surcharge can be used for any purpose, but revenue raised from cess can be used for the specified purpose for which it was created
  • Once the purpose of a cess is fulfilled, ideally it should be eliminated

Other terms related to Taxation

 

Tax Expenditure

  • Tax rates which are applied are nominal in nature, and there are several exemptions, deductions, etc.
  • Thus there is a difference in actual or effective rate of taxation and official rates of taxation
  • This revenue lost due to exemptions etc, are

“revenue forgone” also called tax expenditure

Other terms related to Taxation

 

Equalization levy

  • Started in 2016
  • On companies generating money from online advertising but were exempted from taxation in India because of DTAA
  • 6% tax on the amount paid to internet companies by advertisers in India

Other terms related to Taxation

 

GAFA tax

  • GAFA = oligopoly of internet giants -> Google, Apple, Facebook, Amazon
  • GAFA tax recently introduced in France at 3% on revenue generated from online sales, advertising revenues, selling of private data etc.
  • European Union is mulling on such tax too

Other terms related to Taxation

 

Angel Tax

  • Angel tax is a kind of direct tax that the receiver (startup) of the fund from an angel investor has to pay. It was introduced in the 2012 Budget
  • Under the Income-tax Act, 1961, where a startup (company) receives any consideration for issue of shares which exceeds the fair market value (FMV) of such shares, such excess consideration is taxable in the hands of the recipient as income from other sources